Traders drawn to spread betting

Sponsored Stop loss orders and starting small reduces the novices exposure to risk

Private Wealth Management

Thu, Sep 26, 2013, 10:04

The collapse of the financial markets left countless ordinary investors clinging to the ruins of their pensions, share portfolios and property investments. As a result, financial spread betting has seen a rush of new traders – hungry to learn about the markets and take control of their own finances.

There was a time when private wealth management was the exclusive preserve of those who could afford stockbrokers and well-paid advisors. But that didn’t stop the value of their investments going through the floor. So the logical next question became: “Shouldn’t I learn to do more for myself?”

“The extraordinary thing is that, while virtually every other type of investment has been devastated, the Irish spread betting market hasn’t really been affected by the recession – in fact, its overall value hasn’t shrunk at all since 2007,” says Declan Bourke, managing director of IG Index Ireland.

“One reason seems to be that, apart from the fact that there’s no capital gains tax or stamp duty, which obviously makes it attractive, investors in Ireland are far more sophisticated nowadays – and many of them are using it as a flexible hedging tool.

“As a result, you’ll find farmers looking to fix expenditure on grain, or perhaps SMEs aiming to mitigate currency exposure outside the euro zone”, says Bourke. “That’s why our free client workshops and seminars regularly reach capacity. There’s genuine interest in learning.”

Betting on volatility
One of the main reasons seasoned traders like financial spread betting is that they can make money whether the markets are going up or down. As a trader, you’re not buying the share, you’re simply betting on its movement – so as long as there’s activity in the market, there’s the potential to make a killing. For most traders, the more volatility the better.

“Going long” on a share means betting that its price will rise, while “going short” means betting that it will fall. It was the wave of traders “shorting” banks when they smelt panic during the financial crisis that led to a ban on “naked short selling” – shorting stock without owning the underlying shares – in Germany in 2011 and a 15-day ban in France, Belgium, Italy and Spain the following year.

But whatever trade you’re making, it’s important to keep an eye on market trends – hence the old saying in the financial world: “The trend is your friend.”

Apart from the fact that it’s tax free, the other major attraction of financial spread betting in that you’re trading on margins; you’re borrowing money from your spread betting provider to make your trades.

“For example, for an exposure of €15,000 to bet on a particular stock, you only have to put down three per cent of the total and that gives you the full exposure”, says Brenda Kelly, senior markets strategist with IG Index in London. “You don’t necessarily have to have the capital.”

On the other hand, as so many people have learned to their cost in the turmoil of recent years, the markets can go down as well as up.

“For every cent that the market goes up, you will make a profit, but when the market goes down your losses can seem exaggerated and that is why we recommend that with every trade you use a ‘stop loss’, which will limit your downside.”

A stop loss order, which is a pre-determined value at which you instruct the system to sell, is perhaps the most important single tool at your disposal.

“A stop loss shouldn’t just be a point you’ve decided in your own mind, it should be a concrete pre-determined position,” says Kelly.

“That removes the emotion of the moment from the trade, especially for non-professionals, and it allows you to keep hold of your capital.

“At the start, traders tend to see only the entry point. But ultimately it’s the exit point that determines whether or not you’re successful in a trade. That distinction is crucial when it comes to risk management.”

Once you’ve mastered the trading principles, the financial world is your oyster.

“There’s a whole range of instruments, from individual stocks to the global indices such as the Dow Jones, the FTSE or the Nikkei, for example, or you can trade foreign exchange (forex) or commodities such as gold or oil.

“If you’re an expert in a particular area, you can even take a view on a specific sector, such as banking or electricity, and bet on its performance over a longer period of weeks or months.

“You’re always better off to know your market. As a starter, I would be inclined at the beginning to stay away from some of the most volatile sectors such as forex or maybe oil, which tends to involve very subjective analysis of geopolitical issues and could easily leave a beginner trading in the wrong direction.”

Getting started
So what’s Kelly’s best advice for anyone considering dipping a tentative toe in the choppy waters of international finance?

“Start with stocks. Start with small amounts. You won’t make huge profits initially, but it will make you familiar with your trading platform and gain you experience.

“Another cardinal rule is: only trade with money you can afford to lose. With our free seminars, webinars and live trading workshops, we do our utmost to ensure that everyone is well aware of the risks and how to handle them.

“On the other hand, sometimes you can find a get-rich-quick attitude and that’s not how spread betting works. It’s a way to access the markets and generate an income without paying capital gains tax on your profits. That’s the sensible way to approach it.”